Coping with the challenges

Melrose’s 2021 annual report suggests that conditions are looking up in two divisions. “GKN Automotive and GKN Powder Metallurgy … saw the start of some recovery momentum in the final quarter of 2021, close to that seen in the first half,” says the CEO. “Early signs in the new year show this recovery continuing, and as the constraints of the semiconductor shortage (which has curbed vehicle output) ease further, focus will start to move towards realisation of this value.”

The turnaround focus is now on the aerospace division. “The aviation market continues to navigate pandemic travel restrictions with our businesses expecting growth for the coming year, albeit still below prepandemic levels,” the report continues. “There is a heavy focus on improvement in GKN Aerospace in 2022 and we are confident this will position the business for a strong future.” More details of this will be set out in a briefing for investors on 8 June.

Consensus forecasts are for turnover of £7.7bn in 2022 and £8.2bn in 2023, putting the stock on price/sales ratios of 0.68 and 0.63. Average earnings per share estimates for this year are 7p, with 11.23p pencilled in for 2023. That implies price/ earnings ratios of 17 for 2022 and just over 10.5 for next year. Dividends are forecast to be 2.78p in 2022 and 3.84p in 2023. The firm has cash available to return to investors after asset sales last year reduced net debt to £947m, from £2.85bn the year before, but has put on hold its plans to do so due to uncertain conditions.

The obvious risks are mostly macroeconomic rather than related to the company, including the possibility that inflation squeezes margins, supply constraints continue, or economic growth falters. Despite that, Melrose is a very interesting recovery play at this price.